GDP per worker fell for the five years after 2008 which is unprecedented in post war UK history. In this paper we argue that “capital shallowing” (i.e. the fall in the capital-labour ratio) could be the main reason for this. This is likely to have occurred due to changes in factor prices: a large fall in real wages and increases in the cost of capital. In previous recessions real wages did not fall, but reforms to union strength and welfare have made wages more sensitive to negative demand shocks. This wage flexibility is desirable as it reduces the risks of long-term unemployment building up. After accounting for changes in capital TFP is more similar to earlier recessions and likely to be related to under-utilised resources and misallocation. The fall in labour productivity is therefore likely to reverse if demand improves – e.g. through stronger monetary or fiscal policy stimulus.

Use of this website is subject to, and implies acceptance of, its Terms of use (including Copyright and intellectual property, Privacy and data protection, and Accessibility).
The London School of Economics and Political Science is a School of the University of London. It is a charity and is incorporated in England as a company limited by guarantee under the Companies Acts (Reg no. 70527).The registered office address of the School is: The London School of Economics and Political Science, Houghton Street, London WC2A 2AE, UK; Tel: +44 (0)20 7405 7686